Citigroup to sell $7.5bn stake to Abu Dhabi

Citibank branch in New York City. Citigroup announced late on November 26, 2007 that it had sold a $7.5bn stake to the Abu Dhabi Investment Authority (GETTY)

Citigroup Inc is selling up to 4.9 per cent of itself for $7.5 billion to the Gulf Arab emirate of Abu Dhabi, giving the largest US bank fresh capital as it wrestles with the subprime mortgage crisis and a search for a new chief executive.

The capital injection will shore up Citi's balance sheet, which has been hurt by some $6.8bn of write-downs and losses in the third quarter, and the potential for another $11bn in the fourth quarter.

Citi is paying a high price for the capital injection - the mandatory convertibles it is selling to Abu Dhabi pay a fixed coupon of 11 per cent. That is well above the average yield on US junk bonds of 9.4 per cent, according to Merrill Lynch data.

Abu Dhabi will be Citi's largest shareholder.

The sale to the $650bn Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, may signal the free fall in US financial stocks is close to ending, analysts said.

"Citi is big, it's widely followed, and when people see confidence in it, it should mean something," said Bo Brownstein, an analyst covering financial stocks at Cambiar Investors in Denver, Colorado.

US stocks rallied and the dollar rose against the yen. Citi shares were trading at $30.30 on the New York Stock Exchange late on Tuesday morning, up 1.7 per cent. They had risen as much as 3.9 per cent earlier in the session. Citi's bonds rose relative to Treasuries.

Shares of Citigroup have dropped more than 40 per cent during the last five months, while the US commercial banking sector as measured by the Philadelphia KBW Bank index has fallen about 20 per cent.

Citi's market value has dropped by more than $100bn this year, and on Monday its shares traded at their lowest level in more than five years.

Citi's largest shareholder

Abu Dhabi's investment reflects the increasing financial might of oil-producing countries, which have benefited from a five-fold increase in the price of crude oil during the last six years.

Dubai International Capital, a private equity firm owned by the ruler of Dubai, said on Monday it made a "substantial investment" in Sony Corp, while a separate Abu Dhabi entity earlier this month bought a $622m stake in US-based chip maker Advanced Micro Devices Inc.

Abu Dhabi Investment Authority manages the surplus revenues of the government of Abu Dhabi, the world's sixth-largest oil exporter. Standard Chartered estimated in September its assets were worth $650bn. Both Dubai and Abu Dhabi are members of the United Arab Emirates federation.

State-run funds are keen for stakes in global banks, which can benefit from the development of emerging markets, a person familiar with the funds said.

The authority will have no special rights of ownership or control over Citi and no role in the management or governance of the bank, including no right to name board members.

Sir Win Bischoff, Citi's interim chief executive, said in a statement on Monday: "This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business."

Citi operates in over 100 countries, and has boosted its investments in emerging markets over the last 12 months.

More than $100 billion

Acquisitions in general have taken up some $25bn of Citi capital over the last year, according to CIBC World Markets analyst Meredith Whitney.

Combined with write-downs in the third quarter and expected future write-downs, Citi may have to cut its dividend to replenish its capital, Whitney wrote on October 31. She estimated that Citi would need another $30bn of capital.

Citi said on November 4 it does not plan to cut its dividend. On the same day, Citi said it may take $8bn to $11bn of additional write-downs in the fourth quarter, and that its chief executive Charles Prince was resigning.

That write-down would further eat into Citi's capital. The bank's tier one capital ratio, a measure of financial strength, was at 7.3 per cent in the first quarter, below Citi's target of 7.5 per cent. The new investment will improve Citi's ratio by about 0.6 percentage points, according to Deutsche Bank analyst Mike Mayo.

Citi is taking steps to cut staff and reduce costs, according to press reports. Citi said earlier this year it was cutting about 5 per cent of its staff, or 17,000 jobs.

US Senator Charles Schumer of New York, who opposed Dubai Ports World's 2006 plan to purchase assets at six US ports and raised questions about Borse Dubai's plans to swap stakes with Nasdaq, said the Citi transaction will bolster the bank's competitiveness and "help preserve New York's status as the world's financial center."

After conversion, Abu Dhabi's stake would be larger than the current holding of Saudi Prince Alwaleed bin Talal, who is one of Citi's largest shareholders.

Prince Alwaleed acquired his Citi stake in 1991 when the bank struggled with Latin American loan losses and the US real estate market collapse.

The Abu Dhabi Investment Authority is buying mandatory convertible securities that can be converted into Citi stock in 2010 and 2011 at prices ranging from $31.83 to $37.24 per share. The number of shares it receives will adjust based on Citi's share price, with a higher share price giving the investor fewer shares.

The investment is expected to close within the next few days, Citi said. (Reuters)